Did you know you can use your home to secure funds and pay off other debts?
Second mortgages are a convenient and cost-effective way of doing so, but they should not be taken out without serious consideration.
The Mortgage Force team focuses on educating our clients to provide them with the information they need to make informed financial decisions.
Before taking out a second mortgage on your home, here are a few different things to consider.
How Does a Second Mortgage Work?
A second mortgage is a lien that you take out against your mortgaged property, giving the lender the right to possess and seize the property if you default on the loan. When you take a second mortgage, the lien is taken out against the portion of your home that is already paid off.
You can use the money from your second mortgage for almost anything, such as paying off existing debts on other loans and credit cards.
Second mortgages allow you to use the equity you have in your home, but you can only take out a portion of this equity. This depends on what the value of your home and how much you owe on your first mortgage. This is to ensure that you have a certain amount of equity left in your home (which is usually around 20% of your home’s value).
There are different types of second mortgages you can get:
- Lump-Sum: You can take out a second mortgage in cash as a lump-sum which you can use to pay for your debts or whatever you need. This type of loan is paid off through monthly payments.
- Line of Credit: It’s possible to take out a second mortgage as a line of credit, allowing you to draw on the loan as needed. You then pay it back over time like a credit card.
- Rate Choices: Your lender may offer different rates depending on the mortgage products they offer. Fixed-rate mortgages allow you to pay the same interest rate through the term of the loan while variable rates fluctuate as the market value changes.
Now that you know what a second mortgage is and the options available to you, let’s look at the pros and cons of doing so.
Pros of Getting a Second Mortgage
Lower Interest Rates
By consolidating your debts with a second mortgage, you have an opportunity to pay less in interest. However, it’s important to remember that mortgage rates fluctuate and what is low now may not stay that way in the future.
Unless you choose a fixed-rate mortgage, plan to pay higher interest rates in the long term.
Overall, using your home as collateral for a second mortgage is less risky to lenders so you will receive a lower interest rate than if you went with an unsecured loan.
While this is advantageous when it comes to paying off credit card debt, keep in mind that you won’t save on interest if you run up the balances of your cards again.
Flexible Payment Plans
In most cases, you will be able to extend the amortization period (the length of time you have to pay the loan back) on your second mortgage. This is a huge advantage as you can tailor your payments to suit your income and budget.
Second mortgages allow you to borrow a large amount of money that you may not otherwise be able to access without using your home as collateral.
How much you can borrow depends on the lender, but it’s possible to borrow up to 85% of your home’s value.
Cons of Getting a Second Mortgage
There Are Conditions
In order to be eligible for a second mortgage, you need to have enough equity in your home to cover the entirety of the debts you want to pay off.
Your credit score, employment history, and debt-to-income ratio are all taken into consideration when setting your interest rate on the second mortgage. If your credit isn’t great or you have a high amount of debt compared to your income, you will end up paying a higher interest rate.
Risk of Foreclosure
When you take out a second mortgage, you are basically transforming your unsecured debt into a secured debt. This means that the bank is entitled to take your house if you don’t make your payments.
This is why taking out a second mortgage requires a certain degree of care and self-control. Tapping into your home’s equity to pay off your debt may lead to racking up more debt, especially if you are not careful or your income changes.
When the bank repossesses a home, it’s referred to as “foreclosure” and can negatively impact your credit rating for a long time.
How To Qualify for a Second Mortgage
In order to qualify for a second mortgage, lenders will look at four areas: Equity, Income, Credit Score, and Property.
The more equity you have available in your home, the higher your chances of qualifying for a second mortgage.
Lenders will also look at your income to verify that you have a dependable source of income. This ensures that you can make the payments.
They will also look at your credit score which can impact whether or not you qualify for a second mortgage as well as what your interest rate will be.
Lastly, to mitigate risk factors when it comes to lending you the money (i.e., your credit score), lenders will secure other investments in case you are unable to make your payments.
Explore Your Options!
There are many borrowing options available to help you with your financial needs. If a second mortgage sounds like the way to go, let’s have a chat today!
Our knowledgeable and professional lending specialists are here to work for you and get the right mortgage product to suit your unique and individual needs.